Impact US. Debt Crisis on Automotive industry

Automotive Dealer - Impact US. Debt Crisis on Automotive industry : A U.S. government default on its debt would derail a shaky economic recovery, crimp auto sales and stifle auto makers and suppliers, But most think the catastrophe will be avoided, even though President Barack Obama and House Speaker John Boehner, R-Ohio, remain deadlocked on a plan to cut the federal budget deficit and raise the nation’s $14.3 trillion debt ceiling.

And if they don’t’ reach a solution?

“The psychological impact will be huge, Interest rates would soar and lending would be squeezed. Consumer confidence would fizzle, and the dollar would weaken as investors scurried for safer currencies.

How big might the auto jolt be? IHS Automotive projects U.S. light-vehicle sales of about 12.7 million this year, a forecast that already has been lowered from 13.3 million because of the cooling pace of the recovery.

IHS sees 14.6 million sales next year. But if there is a default, that forecast gets cut by “some big, ugly number,”—as much as 1.5 million to 2 million—said George Magliano, a senior principal analyst at IHS.

Depending on the timing, 2011 sales would be hurt, too, he said.

Mr. Obama cited the prospect of skyrocketing interest rates on loans—including car loans—and the prospect of a “huge and deep recession” in his address to the nation on Monday. Mr. Boehner responded by accusing the president of seeking “a blank check” to continue government spending that is “sapping the drive of our people.”

But industry executives see the two sides coming together before the Aug. 2 deadline.

“I’m very confident we’re going to get a solution,” Alan Mulally, CEO of Ford Motor Co., said in a conference call July 26 after Ford announced a $2.4 billion second-quarter profit.

High stakes

Michael Jackson, CEO of AutoNation Inc., said a “protracted” period without an agreement would disrupt the economy and the auto industry and change his outlook on the unfolding recovery.

“Hopefully, Washington will still do what’s right for the country and find a solution,” he said. “The stakes are high. There’s no doubt about that.”

Several executives said they can do little but wait. They said changes they made to survive the industry collapse of 2008-2009—building cash reserves, raising liquidity and curbing capital outlays—put them in better shape to deal with any blow stemming from the deadlock in Washington.

“We’re in a much better position than we were when the great recession hit,” said Craig Monaghan, CEO of Asbury Automotive Group.

In the event of a default-spurred crisis, he said Asbury would trim used-car inventory to about $50 million, or about half the current value, to free up cash. The company also would likely reduce staff and new-car stocks.

In the meantime, Asbury has bolstered liquidity by stockpiling $100 million in cash, with another $100 million available in bank credit lines.

“I think we could survive for quite some time in a very harsh environment,” Mr. Monaghan said.

Building cash

Earl Hesterberg, CEO of Group 1 Automotive, said consumers are becoming more jittery each day the stalemate in Washington drags on. He also said he thinks both sides will come to terms.

If they don’t?

“We just prepare ourselves to be able to adjust to another sales downturn,” said Mr. Hesterberg, who steers the nation’s fourth-largest auto retailer.

“If we adjusted to the 30 percent drop in revenue in one quarter, back in the fall of ‘08 or the beginning of ‘09, then we’re confident we can deal with anything that comes our way,” he said. “That’s why we’ve lowered our debt and we have a big cash position.”

AutoNation’s Mr. Jackson echoed that view.

“I’m more concerned about what it does to the overall economic recovery in the U.S.,” he said. “What does it do to jobs in the U.S., and consequently what does it do to the overall outlook for auto sales in the U.S.?”

The impact of a default on the auto industry would ripple far beyond showrooms, said Ron Harbour, president of Harbour Consulting in Troy, Mich.

“It’s not only the cost of borrowing for those who want to lease or purchase a car,” he said. “It’s the cost of borrowing money for suppliers and OEMs and so forth.”

Higher borrowing costs would hamper Ford, for example, as it seeks to chip away at its $14 billion debt.

As for suppliers? “They’re already limited by their financial condition. If the banks limit them even more, it would significantly hurt their health, their ability to deliver to the OEMs on time,” Mr. Harbour said.

Being prepared

Cleveland-based Eaton Corp., which supplies engine and transmission parts, superchargers, fuel emission and safety controls, is maintaining a highly liquid balance sheet in part because of issues like the debt debate, CEO Sandy Cutler told the The Wall Street Journal.

The company had $282 million in cash and $601 million of short-term investments on hand at the end of June.

“We’re well-equipped to be able to deal with what may come out of either some action or lack of action over the next couple of weeks,” Mr. Cutler told the paper.

Standard & Poor’s, in an analysis released July 21, warned a U.S. government default would fuel a “negative feedback loop” in which high unemployment would lower consumer confidence; consumers would cut spending; corporate profits would fall; and companies would cut jobs.

“The auto sector would fit into that negative feedback loop, as would other sectors with exposure to the consumer,” said Robert Schulz, managing director of S&P Ratings Services.

“It’s hard to separate out an effect that’s unique to autos, other than that vehicles are big-ticket items,” Mr. Schulz said in a phone interview. “And that means some of the slower sales we’re already experiencing are probably because consumers are hesitant to take on debt.”

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